Your Credit Rating
When you apply for a car loan, the lender will review your credit score, among other things, so it's important to know as much about it as you can before setting foot in a dealership. Even if you already know you don't have ideal credit, there are steps you can take to improve it.
What Goes Into a FICO Score
You may have heard of a FICO score, which is what most lenders use when determining your credit-worthiness. What goes into a FICO score, however, is less well-known. According to Barry Paperno, consumer operations manager for FICO, scores consist of five components, each of which has a certain level of significance within the overall score.
|Your FICO Score|
|Factor||Percent of Score||Key Elements|
|Payment history||35||How you do — or don't — pay your bills.|
|Amounts owed||30||How much you owe on different kinds of debt, specifically credit card debt.|
|Length of credit history||15||How long you've been using credit.|
|New credit||10||The degree to which new accounts have been opened.|
|Different types of credit||10||The mix of debt you have.|
FICO scores are calculated using information from credit bureaus, according to Paperno, and can range from 300 for people with very poor credit to 850 for those with excellent credit. In today's market, you'll probably need to have a fairly high score to qualify for the best rates.
"Typically, now you're hearing that 740 and above is a good credit score," said Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. "If you're down in the [500s] you're going to get denied, and you probably should."
To see the range of auto-loan interest rates a given FICO score might be able to qualify for, check out the table on the home page of myFICO.com. For example, a credit score of 720 might get you a car loan with a 6 percent interest rate, but if your score is 580 you might only qualify for a 16 percent rate.
Your credit score, however, is just one of many factors considered by lenders. The size of your down payment, the loan term and amount, and the applicant's job stability can play a role in any loan, according to Chase spokeswoman Mary Kay Bean.
Improving Your Credit Score
Even if you have a less-than-ideal credit score, it doesn't have to stay that way. Cunningham encourages consumers looking to improve their score to focus on the first two elements — payment history and amounts owed — as they make up a significant portion of the score.
The advice to improve your payment history is fairly straightforward.
"Very simply put: Pay your bills and pay them on time," Cunningham said. The payment history portion is the most significant element of the FICO score, and your most recent late payment is the most important part of it, Paperno said.
"If you don't go late again, with every month that passes since your late payment it's going to be good for your score," Paperno said.
Cunningham also recommends making sure you're not near your credit limit to improve the amounts-owed section.
"The smart consumer will only utilize 30 percent of your available credit. Doing otherwise sends the signal that you don't have any money," she said.
Regardless of your efforts, your credit score probably won't change overnight, but there is some good news for those who don't have sterling credit.
"If your score is in the 500s or 600s it will respond quicker" to improvement efforts, Cunningham said. "Responsible behavior over time will raise your score."
Protecting Your Credit Score
If you've worked hard to build up a great FICO score, you'll want to keep it that way so that you can get the best car loan rate. Cunningham recommends checking your credit report — which is what your credit score is based on, Paperno said — at annualcreditreport.com. There, you can obtain a free credit report from each of the three major credit bureaus — Experian, Equifax and TransUnion — every year.
"Get your credit report and see what it says," Cunningham said. "Any disputes, any discrepancies — get them cleaned up."
You can also purchase your credit score from these bureaus.
If you'd like to keep an even closer watch over your credit score, you can monitor it for a fee. MyFICO.com, for instance, sells an $12.95-a-month service that alerts you when your score changes.
Can Credit Checks Hurt Your Score?
Numerous lender-initiated credit checks have the potential to lower your score, but Paperno says that when they occur in a short time span they're usually grouped together as one inquiry. (In contrast, a self-check of your credit history — what Cunningham calls a soft inquiry — shouldn't negatively impact your score.) Still, Paperno says not to be overly concerned about inquiries.
"You can only do so much damage through inquiries," Paperno said. "It's not as important as how much you pay and how much you owe."